Estimating the Continuous-Time Consumption-Based Asset-Pricing Model

The consumption-based asset-pricing model predicts that excess yields are determined by the market's degree of relative risk aversion and by the covariances of per capita consumption growth with asset returns. Estimation and testing are complicated by the fact that the model's predictions relate to the instantaneous flow of consumption and point-in-time asset values, but only data on the integral or time average of the consumption flow are available. This article shows how to take account of the effects of time averaging on the covariances. We estimate the model's parameters and test the overidentifying restrictions using six different data sets.